1. Third Party Retailing Strategy Steve Fosh Head of Third Party Retailing, ATOC GTMC – Surface Transport Strategy Group Wednesday 2 nd April 2014 This document and the information it contains is confidential. It may only be used by the ATOC member company or other organisation to whom it has been provided and may not be disclosed to any third party without ATOC’s consent.

2. Content Background and trends in the rail market Forward strategy from April 2016 Commission and TARIF Next steps Confidential

3. Background and trends in the rail market Confidential

4. Background ATOC has been undertaking a strategic review of third party retailing (TMCs, internet and international) since last summer. Some wider elements of industry retailing strategy have also been reviewed. Why the need for a review? –We had undertaken to carry out a review as part of our Business Plan activity for 2013/14 –Current commission arrangements come to an end in March 2016. –Perceived need for longer term visibility on strategy and commission rates in TMC and internet markets Views have been sought from a range of stakeholders including the GTMC, who gave a presentation to ATOC’s Commercial Board in November 2013 The review is now largely complete and we have been informally taking views on the planned forward strategy.

5. Trends in the rail retailing market Over the last ten years there have been considerable change in the rail retailing market with significant migration away from station ticket offices In the short distance market, sales have moved to Ticket Vending Machines and, in London, Oyster PAYG. In the long distance market they have moved to the internet and, to a lesser extent, to TMCs. TMCs now represent around 9% of the total rail market by revenue, 11% if Season Tickets are excluded Total TMC rail revenue is projected to be £703M for 2013/14 against total industry revenue of £6.2bn (not including season tickets) The total business travel rail market is estimated at around £1.4bn for 2013/14 and the long distance travel market (most relevant to TMCs) is estimated to be around £710m in 2013/14 The TMC share of the long distance rail business travel market is estimated to be around 70% (market share numbers are provisional at the moment) Confidential

6. Trends in the TMC market Over the last ten years TMC revenue has grown significantly from £278m in 2003/4 to £703m in 2013/14 Growth has outstripped total industry revenue and sales through station ticket offices The market is dominated by the top 15 TMCs who account for roundly 80% of the market Based on GTMC data, we believe that rail has become relatively more important to TMCs with growth in rail bookings outstripping growth in air, car rental and hotels over recent years Confidential

7. TMC revenue since 2003 Commission changes: 9% & 7% 5% 4% & 3% 3% (2 nd May 2004) (6 th January 2008) (25 th July 2010) (1 st April 2011)

8. TMC revenue growth vs industry revenue growth (indexed)

9. GTMC member transactions

10. Forward Strategy

11. Forward strategy for TMCs Firstly which rail distribution channels do we include in the TMC sales category? –TA/TMCs trading under an ATOC TA Licence –TMCs operating under third party internet retailer licences –Third party internet retailers offering TMC service to direct corporate clients So what are we proposing the forward strategy to be for TMCs from April 2016? Confidential

12. Forward strategy - TMCs TMC commission will be extended at 3% until 31 st March 2019 Commission post April 2019 will be extended on a three year rolling basis (i.e. three years notice of any changes to commission) to provide better alignment with TMC corporate contracts All TMCs will, as now, have the ability to enter into additional bilateral arrangements with TOCs New fulfilment technology will be offered to TMCs, where ATOC is able to do this (DfT and other stakeholders have important roles in this area), as part of wider industry ticketing strategy

13. Forward strategy – internet and international retailing markets Internet commission will be extended, at 5%, until 31 st March 2019 In 2017/18 (possibly earlier) there will be an open book review of cost savings from new technology (new forms of ticketing in particular) with any residual savings being shared equally between TOCs and retailers (through an adjustment in commission) Commission from April 2019 onwards will be extended on a three year rolling basis (i.e three year notice to any change to commission) All retailers will, as now, have the ability to enter into additional bilateral arrangements with TOCs New fulfilment technology to be offered to internet retailers where ATOC is able to do this (DfT and other stakeholders have important roles in this area), as part of wider industry ticketing strategy Number of international licences to be extended to 3 or 4 from current 2. Britrail Pass to be managed by ATOC from October 2014 and made available for sale by all international licensees

14. Other changes related to TMC market As part of the wider strategic review there are some of other aspects of the rail retailing market which are currently under review including: –Season ticket retailing –TOC Business Travel Service (BTS) commission rate –Current range of licences We expect to announce any changes in these areas in due course

15. Commission and TARIF

16. Summary of commission rates until end March 2016

17. The licensing of third party retailers Rail industry generally licenses third party retailers on a collective basis through ‘Scheme’ arrangements that were put in place at privatisation (a ‘network benefit’ arrangement) TOCs can also licence retailers in their own right and there are a few examples of this. Main benefit of this collective arrangement from a TMC point of view is that TMCs only need to have one licence to sell on behalf of all TOCs. The alternative would be for each TMC to seek bilateral arrangements with a licensing TOC, where a TOC was willing to do this The current approach provides stability in the context of fixed, relatively short term franchises (i.e. no need to negotiate new agreements when franchises changed). It has proved to be an effective model and ATOC has extended the range of licences to include internet retailing and the international market

18. Commission arrangements TOCs through the collective scheme set a base commission rate for all ATOC licensed third party retailers In all cases this base commission can be augmented by additional, bilateral third party –TOC arrangements. ATOC is not involved in these arrangements In all cases third party retailers are explicitly allowed to charge fees to their customers (subject to compliance with consumer law etc) TOCs/ATOC take into account a number of factors when considering base commission levels: –cost of sale –average transaction values –ability to earn other remuneration –general market environment and market benchmark rates –comparability with other rail industry commission rates

19. Rationale for commission rate structure TMCs –High average transaction values –Business model based on outsourced travel management for which fees are charged (with commission some times passed back to the client) –No impartiality requirement Internet retailers –Higher than average transaction values –Some ability to charge fees (and realise other ancillary income) for third party retailers (but not for TOCs) –Cost of sale relatively low Station retailing –Low average transaction values for non-season ticket sales –Season ticket average transaction values higher but commission rate 2% and higher after-sales costs –No ability to charge fees (prohibited by regulation) –Relatively high cost of sale and ability to reduce cost of sale limited by regulation Business Travel Facility (public internet sites) –SME sub section of a public internet site –No TMC-type account management service offered –Cash business only (no credit accounts) –5% commission level applies to service users with annual spend of less than £50K and 3% for those over £50K.

20. Travel Agents Reserve Insurance Fund (TARIF) TARIF was developed, following close collaboration between the rail industry and TMCs, as a low cost alternative to the provision of bonds as a means to provide financial cover in the event of a financial failure through a participating TMC. At scheme commencement in May 2011 participating TMCs were required to pay a scheme levy of 0.36% of their periodic rail sales into a central fund which is there to pay for: –Policy premiums –The cost of scheme administration –The cost of covering policy excess elements We have reached a stage where the fund is sufficient to cover the cost of the policy excess amounts and as such the scheme levy really only needs to finance the annual policy premiums and associated scheme administration costs. As a result the levy will be reducing to 0.18% from 1 st May 2014 We will shortly be entering into discussions with the insurance brokers to determine policy options from 1 st May 2015 when the current deal expires.

21. Next steps ATOC is currently informally taking views on future strategy and progressing the review of wider issues Plan is to finalise by May and then write to all third party retailers Need to take changes through ATOC’s formal governance process Wish to continue to work in strong partnership with TMCs Confidential